Companies have snapped up their own shares on the open market with increasing frequency in recent months. They do so for a variety of reasons, and investors have long used their actions as a signal to buy or sell shares on their own.
Believers in the buyback play offer a simple rationale: Who better than the firm’s own management would have a solid grasp of the company’s prospects in the competitive landscape and therefore its true value relative to its market price?
Others may view it obvious but still effective gimmickry aimed at goosing share prices by manufacturing higher earnings per share.
A pair of ETFs provide exposure to the buyback play, but they differ greatly despite their common strategy.
I’ll look briefly at each.
The PowerShares Buyback Achievers Portfolio (NYSEArca: PKW) is the larger and more liquid of the two. Launched in 2006, PKW was the first mover here. It holds a healthy $230 million in assets and trades at decent 10 basis point spreads.
The fund holds U.S. firms that have repurchased sizable chunks—5 percent or more—of their outstanding shares over the past 12 months. Top holdings include familiar names like IBM, Intel, Home Depot and Disney.
In the aggregate, PKW’s basket of stocks differs from a plain-vanilla cap-weighted portfolio a whole lot less than you’d expect given its niche focus. Large-caps dominate the basket and sector exposure is marketlike except for a bias to consumer cyclical stocks.
Not surprisingly, PKW’s performance overall during the past year looks a lot like the broad market, which is to say, good.
The question then is, Why bother?
Smart beta isn’t smarter than cap weighting, but it is different, and that’s good.
Trial by fire is one way to discover why ETF transparency matters.
Most people now realize leveraged ETFs can hurt you, but how, then, to use them?
What would a shift out of a mutual fund and into an ETF look like up close?